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ACCA Applied Knowledge · Financial Accounting · Qualitative characteristics of useful financial information

A company's transaction is not covered by any IFRS Accounting Standard. The finance director wants to know what guidance the Conceptual Framework gives. Which is correct?

When no IFRS covers a transaction, management develops its own accounting policy aimed at relevant and faithfully representative information, using the Conceptual Framework's definitions and concepts as guidance. Omitting the item, copying a competitor or following tax rules is not what the Framework requires.

  1. AThe company must apply the treatment used by the largest competitor in its industry
  2. BThe company may omit the item from the financial statements until a standard is issued
  3. CThe company should develop an accounting policy that gives relevant and faithfully representative information, using the Framework's definitions and concepts as a guideCorrect
  4. DThe company must apply the tax authority's treatment of the item

Explanation

Where no standard applies, management develops a policy producing information that is relevant and faithfully represents the transaction, referring to the Framework's definitions of elements and recognition criteria. Omitting the item would fail to represent it faithfully. Copying a competitor or using tax rules has no basis in the Framework.

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